Mayor Walter E. Washington and the D.C. Department of Environmental Service rejected in 1974 a plan to automate fully the city's error-prone, inaccurate and frequently tardy water billing system for an initial fee of $54,000 plus $60,000 a year in leasing costs, The Washington Post has learned.

In the three years since, the department had spent several times that amount - $40,000, according to one knowledgeable source - in overtime pay and other related costs in an almost futile effort to mend a system still dominated by manual billing efforts.

At the time the plan was rejected the mayor contended that the city did not have enough money to contract with the Burroughs Corporation, a nationally known management firm that made the porposal, and that the city could automate the system on its own.

Although Burroughs claimed in 1974 that it could fully computerize the billing system within three months, no such thing has happened. Earlier this year, thousands of city water customers were angered when the system produced unusually large and often incorrect bills.

No funds to automate the system have been included in the mayor's budgets for 1978 or 1979. Instead, the city hopes to finance the automation through a special municipal oversight commission set up last year by Congress and only now beginning its work. Full automation, city water officials said recently, is at least one or two years away.

A spokesman for the mayor said yesterday that the mayor does not recall the incident. DES associate director John Ingram said he could not give specifics of the Burroughs negotiations or the department's catch-up costs without considerable analysis of DES records. "I would say that's way the hell off the mark," Ingram said of the $400,000 figure.

Since 1970, when the deparments's tow top water-billing officials left their jobs about the same time, billing of the city's 120,000 customers rarely has been accurate.

Bills have been sent out as much as two years late, and some customers have received bills as much as 100 times higher than previous bills. In some cases, bills for several thousand dollars have been sent to single family homes.

In frantic efforts to comply with deadlines imposed by the City Council, water bills have been rushed out without being checked and often have been found incorrect. In its efforts to balance the city budget, the Council also has been unable to estimate accurately how much money will be produced each year by water and sewer billings.

City wate rofficials contend that a major flaw in the present system is that it is primarily manual and thus very liable to error.

The Burroughs proposal was made in December, 1974, following completion of a $3,000 study of DES operations, according to Albert E. Braveboy, and associate account manager for the firm. Burroughs planned to install a minicomputer in the water billing office and three viewing terminals to allow clerks in the collection section to punch up within seconds accounts.

Currently, all computer operations are done in the city's computer center across the street from the water revenue division office at 499 Pennsylvania Ave. NW.

Some customers who called the division about their bills have waited as long as 10 minutes before their account records could be retrieved. At times, water officials acknowledge, they have stopped answering telephones to devote full-time to researching previous complaints.

Braveboy said the city would have been billed $54,000 in one-time consultant and preparation fees and $5,000 a month to lease machines from Burroughs. One source familiar with the plan said an additional several thousand dollars would have been required to change from one system to another.

Ingram made an initial commitment to use the plan. Braveboy said, but later withdrew that commitment when the city's Office of Budget and Management Systems recommended that the city use its own facilities to automate.

Last August, the city began a $39,000, two-phase study with another consulting firm that would have placed the water billing system on the verge of automation - the same thing Burroughs had done for $3,000 in 1974. Those plans were never completed.

One knowledgeable source said the city paid $100,000 in 1975; $100,000 in 1976, and has spent $50,000 this year in overtime costs involving waterbills. The city also has spent $150,000 for planning, extra computer runs and machine rental, the source said.